DEFENSE HEALTH 

CARE

Evaluation of 

TRICARE Pharmacy 

Services Contract 

Structure Is 

Warranted

Report to the Committee on Armed 

Services, U.S. Senate

September 2013

GAO-13-808

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-808, a report to the 

Committee on Armed Services, U.S. Senate

September 2013

DEFENSE HEALTH CARE

Evaluation of TRICARE Pharmacy Services Contract 

Structure Is Warranted

Why GAO Did This Study

DOD offers health care coverage—

medical and pharmacy services—to 

eligible beneficiaries through its 

TRICARE program. DOD contracts 

with managed care support contractors 

to provide medical services, and 

separately with a pharmacy benefit 

manager to provide pharmacy services 

that include the TRICARE mail-order 

pharmacy and access to a retail 

pharmacy network. This is referred to 

as a carve-out contract structure. 

DOD’s current pharmacy contract ends 

in the fall of 2014. DOD has been 

preparing for its upcoming contract 

through acquisition planning, which 

included identifying any needed 

changes to contract requirements.

Senate Report 112-173, which 

accompanied a version of the NDAA 

for fiscal year 2013, mandated that 

GAO review DOD’s health care 

contracts. For this report, GAO 

examined: (1) how DOD identified 

changes needed, if any, to 

requirements for its upcoming 

pharmacy services contract; and 

(2) what, if any, assessment DOD has 

done of the appropriateness of its 

current contract structure. GAO 

reviewed DOD acquisition planning 

documents and federal regulations, 

and interviewed officials from DOD and 

its pharmacy services contractor.

What GAO Recommends

GAO recommends that DOD conduct 

an evaluation of the potential costs and 

benefits of alternative structures for the 

TRICARE pharmacy services contract, 

and incorporate such an evaluation 

into acquisition planning. DOD 

concurred with GAO’s 

recommendations. 

What GAO Found

The Department of Defense (DOD) used various methods to identify needed 

changes to requirements for its upcoming pharmacy services contract. During 

acquisition planning for the upcoming TRICARE pharmacy services contract, 

DOD solicited feedback from industry through its market research process to 

align the contract requirements with industry best practices and promote 

competition. For example, DOD issued requests for information (RFI) in which 

DOD asked questions about specific market trends, such as ensuring that certain 

categories of drugs are distributed through the most cost-effective mechanism. 

DOD also issued an RFI to obtain information on promoting competition, asking 

industry for opinions on the length of the contract period. DOD officials told us 

that responses indicated that potential offerors would prefer a longer contract 

period because it would allow a new contractor more time to recover any capital 

investment made in implementing the contract. The request for proposals for the 

upcoming contract, issued in June 2013, included a contract period of 1 base 

year and 7 option years. DOD also identified changes to contract requirements in 

response to legislative changes to the TRICARE pharmacy benefit. For example, 

the National Defense Authorization Act (NDAA) for fiscal year 2013 required 

DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who 

are also enrolled in Medicare Part B. DOD officials incorporated this change in 

the requirements for the upcoming pharmacy services contract.

DOD has not conducted an assessment of the appropriateness of its current 

pharmacy services contract structure that includes an evaluation of the costs and 

benefits of alternative structures. Alternative structures can include incorporating 

all pharmacy services into the managed care support contracts—a carve-in 

structure—or a structure that incorporates certain components of DOD’s 

pharmacy services, such as the mail-order pharmacy, into the managed care 

support contracts while maintaining a separate contract for other components. 

DOD officials told GAO they believe that DOD’s current carve-out contract 

structure continues to be appropriate, as it affords more control over pharmacy 

data that allows for detailed data analyses and cost transparency, meets 

program goals, and has high beneficiary satisfaction. However, there have been 

significant changes in the pharmacy benefit management market in the past 

decade, including mergers and companies offering new services that may 

change the services and options available to DOD. GAO has previously reported 

that sound acquisition planning includes an assessment of lessons learned to 

identify improvements. Additionally, GAO has reported that a comparative 

evaluation of the costs and benefits of alternatives can provide an evidencebased rationale for why an agency has chosen a particular alternative. Without 

this type of evaluation, DOD cannot effectively demonstrate that it has chosen 

the most appropriate contract structure in terms of costs to the government and 

services for beneficiaries.

View GAO-13-808. For more information, 

contact Debra A. Draper at (202) 512-7114 or 

draperd@gao.gov.
Page i GAO-13-808 DOD Pharmacy Services Contract

Letter 1 

Background 4

DOD Used Various Methods to Identify Changes to Contract 

Requirements for the Upcoming and Current Pharmacy Services 

Contracts 13

DOD Has Not Conducted an Assessment of Its Pharmacy Services 

Contract that Includes an Evaluation of the Costs and Benefits 

of Alternative Structures 19

Conclusions 24

Recommendations for Executive Action 25

Agency Comments and Our Evaluation 25

Appendix I Certification Standards for and Experience of TRICARE 

Pharmacy Services Contract Officials 27

Appendix II Comments from the Department of Defense 29

Appendix III GAO Contact and Staff Acknowledgments 31

Tables

Table 1: TRICARE Pharmacy Copayments/Coinsurance by Type of 

Prescription, As of February 2013 5

Table 2: Acquisition Training, Education, and Experience 

Certification Standards and Pharmacy-Specific Experience 

of Officials Who Award or Administer the TRICARE 

Pharmacy Services Contract 28

Figures

Figure 1: Evolution of TRICARE Pharmacy Services Contract 7

Figure 2: Selected Roles and Activities in the Acquisition Process 

for DOD’s Pharmacy Services Contract 10

Contents 
Page ii GAO-13-808 DOD Pharmacy Services Contract

Abbreviations

COR contracting officer’s representative

DFARS Defense Federal Acquisition Regulation 

 Supplement

DOD Department of Defense

FAR Federal Acquisition Regulation

NDAA National Defense Authorization Act

RFI request for information

RFP request for proposals

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Page 1 GAO-13-808 DOD Pharmacy Services Contract

441 G St. N.W.

Washington, DC 20548

September 30, 2013

The Honorable Carl Levin

Chairman

The Honorable James M. Inhofe

Ranking Member

Committee on Armed Services

United States Senate

In fiscal year 2012, the Department of Defense’s (DOD) military health 

system offered comprehensive health care coverage—including a 

pharmacy benefit—to nearly 9.7 million eligible beneficiaries through its 

TRICARE program.1 DOD’s pharmacy benefit allows TRICARE 

beneficiaries to obtain prescription drugs either from military treatment 

facility pharmacies operated by DOD or from TRICARE’s mail-order and 

retail pharmacies operated through the private sector. In its current 

contract structure, DOD contracts with managed care support contractors 

to provide medical services,2 and contracts separately with a pharmacy 

benefit manager, Express Scripts, Inc., to operate the TRICARE mailorder pharmacy and provide access to a retail pharmacy network. DOD’s 

current pharmacy services contract is set to expire in the fall of 2014, and 

DOD has issued a request for proposals (RFP) for its next pharmacy 

services contract,3

DOD has been preparing for its upcoming pharmacy services contract 

through its acquisition planning process, which included identifying any 

planned changes to contract requirements—the work to be performed by 

the contractor. Federal regulations require agencies to perform 

acquisition planning activities for all contracts to ensure that the 

which it estimates will cost a total of $4.4 billion.

 

1

Eligible beneficiaries include active duty personnel and their dependents, Reserve and 

National Guard personnel and their dependents, and retirees and their dependents and 

survivors.

2

DOD contracts with managed care support contractors in three regions to provide 

networks of private sector providers for TRICARE and to perform other customer service 

functions, such as processing claims and assisting beneficiaries with finding providers.

3

The RFP was issued in June 2013, and proposals are due October 7, 2013. The 

upcoming contract is scheduled to begin November 1, 2013, and includes 1 base year and 

7 option years. The base year is a transition period and overlaps with the last year of the 

current contract.

 
 

Page 2 GAO-13-808 DOD Pharmacy Services Contract

government meets its needs in the most effective, economical, and timely 

manner possible.4 We have previously reported that inadequate 

acquisition planning can increase the risk that the government may 

receive services that cost more than anticipated, are delivered late, and 

are of unacceptable quality.5 Federal regulations also allow agencies to 

make changes to requirements in existing contracts, as needed.6

Senate Report 112-173, which accompanied the Senate Armed Services 

Committee’s version of the National Defense Authorization Act (NDAA) 

for fiscal year 2013, mandated that GAO conduct a comprehensive 

review of DOD’s health care contracts,7

To determine the steps DOD took to identify changes needed, if any, to 

contract requirements, we focused on DOD’s preparation for the 

upcoming contract and administration of the current contract. We 

reviewed documents related to DOD’s acquisition planning, including 

market research documentation and the draft and final RFP for the 

upcoming contract. We also reviewed relevant federal regulations, 

including the Federal Acquisition Regulation (FAR) and Defense Federal 

Acquisition Regulation Supplement (DFARS),

which include the pharmacy 

services contract. In this report, we review: (1) how DOD identified 

changes needed, if any, to requirements for its upcoming and current 

pharmacy services contracts; and (2) what, if any, assessment DOD has 

done of the appropriateness of its current pharmacy services contract 

structure.

8

 

4

Federal Acquisition Regulation (FAR) § 7.102. The FAR defines acquisition planning as 

the process by which the efforts of all personnel responsible for an acquisition are 

coordinated and integrated through a comprehensive plan for fulfilling the agency need in 

a timely manner and at a reasonable cost. It includes developing the overall strategy for 

managing the acquisition. FAR § 2.101.

as they relate to 

5

See GAO, Acquisition Planning: Opportunities to Build Strong Foundations for Better 

Services Contracts, GAO-11-672 (Washington, D.C.: Aug. 9, 2011). 

6

FAR § 43.103. Contract modifications may be either bilateral or unilateral. The FAR limits 

unilateral changes to those that are within the general scope of the contract. FAR 

§ 43.201.

7

S. Rep. No. 112-173, at 131-32 (2012).

8

The FAR codifies uniform policies for the acquisition of supplies and services across the 

federal government, and the DFARS contains further implementing regulations for the 

FAR for DOD, including DOD-wide policies, delegations of FAR authorities, and deviations 

from FAR requirements.
 

Page 3 GAO-13-808 DOD Pharmacy Services Contract

acquisition planning. We interviewed DOD officials about their acquisition 

planning efforts, including changes to the contract requirements they 

determined were necessary and the reasons for those changes. We also 

interviewed officials from DOD’s current pharmacy services contractor 

about the department’s efforts to solicit industry feedback in making 

changes to requirements for the pharmacy services contract. In addition, 

we interviewed officials from the Pharmaceutical Care Management 

Association (the trade group representing the pharmacy benefit manager 

industry, including Express Scripts) and Pharmaceutical Strategies Group 

(a pharmacy benefit consulting organization) to obtain their perspectives 

on industry trends and DOD’s process for obtaining industry input. 

To determine what, if any, assessment DOD has done of the 

appropriateness of its current pharmacy services contract structure, we 

reviewed DOD documents, including congressional testimony and 

projected cost estimates related to the initial decision to contract for 

pharmacy services separately from its managed care support contracts—

referred to as a carve-out contract structure. In addition, we interviewed 

DOD officials about the reasoning behind this decision. We also reviewed 

DOD documents, including the report from the Task Force on the Future 

of Military Health Care that made recommendations regarding the 

structure of the pharmacy services contract, and DOD’s official response 

to the report.9 We also interviewed DOD officials about any efforts to 

determine whether the current carve-out structure continues to be 

appropriate. We analyzed these documents in the context of GAO’s Cost 

Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs,

10 which provides guidance to the 

federal government on cost-benefit analysis. We interviewed officials from 

DOD’s three current managed care support contractors to obtain their 

perspectives on the current pharmacy services contract structure. We 

also reviewed health plan research literature and interviewed officials 

from the two industry groups described above about industry practices.

 

9

See Department of Defense, Final Report of the Task Force on the Future of Military 

Health Care (Washington, D.C.: December 2007) and Department of Defense Military 

Health System Senior Oversight Committee, Response to the Recommendations of the 

Task Force on the Future of Military Health Care (Washington, D.C.: January 2009).

10GAO, Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009).
 

Page 4 GAO-13-808 DOD Pharmacy Services Contract

We conducted this performance audit from February 2013 to September 

2013 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

TRICARE beneficiaries used the program’s pharmacy benefit to fill almost 

134 million outpatient prescriptions in fiscal year 2012. Through its 

acquisition process, DOD contracts with a pharmacy benefit manager—

currently Express Scripts—to provide access to a retail pharmacy network 

and operate a mail order pharmacy for beneficiaries, and to provide 

administrative services.

Under TRICARE, beneficiaries have three primary health plan options in 

which they may participate: (1) a managed care option called TRICARE 

Prime, (2) a preferred-provider option called TRICARE Extra, and (3) a 

fee-for-service option called TRICARE Standard.11

TRICARE’s pharmacy benefit has a three-tier copayment structure based 

on whether a drug is included in DOD’s formulary and the type of 

pharmacy where the prescription is filled. (See table 1.) DOD’s formulary 

includes a list of drugs that all military treatment facilities must provide, 

and a list of drugs that military treatment facilities may elect to provide on 

the basis of the types of services offered at that facility (e.g., cancer drugs 

TRICARE 

beneficiaries may obtain medical care through a direct-care system of 

military treatment facilities or a purchased-care system consisting of 

network and non-network private sector primary and specialty care 

providers, and hospitals. In addition, TRICARE’s pharmacy benefit—

offered under all TRICARE health plan options—provides beneficiaries 

with three options for obtaining prescription drugs: from military treatment 

facility pharmacies, from network and non-network retail pharmacies, and 

through the TRICARE mail-order pharmacy.

 

11In addition, retirees and their family members may obtain coverage through TRICARE 

for Life, which offers additional coverage to beneficiaries enrolled in Medicare Part B. 

TRICARE for Life covers most costs not covered by Medicare, including Medicare’s 

coinsurance and deductible. 

Background 

TRICARE’s Pharmacy 

Benefit 
 

Page 5 GAO-13-808 DOD Pharmacy Services Contract

at facilities that provide cancer treatment).12

Table 1: TRICARE Pharmacy Copayments/Coinsurance by Type of Prescription, As of February 2013

DOD also can classify drugs 

as “non-formulary” on the basis of its evaluation of their cost and clinical 

effectiveness. Non-formulary drugs are available to beneficiaries at a 

higher cost, unless the provider can establish medical necessity.

Type of prescriptiona

Type of pharmacy Formulary generic drugs Formulary brand-name drugs b Non-formulary drugs b

Military treatment facility $0 c $0 Not offered

TRICARE mail-order $0 c $13 $43

Network retail $5 d $17 $44

Non-network retail,d 50% copayment after 

the point-of-service 

deductible is met

 

TRICARE Prime

50% copayment after 

the point-of-service 

deductible is met

50% copayment after 

the point-of-service 

deductible is met

Non-network retail,d $17 or 20% of the total, 

whichever is greater, after 

the deductible is met

TRICARE 

Extra and TRICARE Standard

$17 or 20% of the total, 

whichever is greater, after 

the deductible is met

$44 or 20% of the total, 

whichever is greater, after 

the deductible is met

Source: GAO analysis of DOD information.

Note: Active duty servicemembers are not required to pay copayments or coinsurance. However, 

active duty servicemembers who fill prescriptions for covered drugs under the pharmacy benefit at 

non-network retail pharmacies are required to pay the total cost of the drug and then file a claim for 

reimbursement with the pharmacy services contractor.

a

TRICARE offers formulary and non-formulary drugs. Formulary drugs are those on DOD’s list of 

covered drugs. Non-formulary drugs can be obtained at formulary drug costs if medical necessity is 

established by the provider.

b

A brand-name drug is a drug marketed under a proprietary, trademark-protected name. After any 

patent and market exclusivity for the brand-name drug expires, other drug companies may develop a 

generic equivalent—a similar drug that has the same active ingredient, strength, dosage form, route 

of administration, and intended use.

c

Prescriptions filled at a military treatment facility or through the TRICARE mail-order pharmacy are 

limited to a 90-day supply.

d

Prescriptions filled at a network or non-network retail pharmacy are limited to a 30-day supply.

 

12DOD is required to make all clinically appropriate drugs available to servicemembers 

and, with the exception of certain classes of drugs such as those for weight loss, DOD 

makes all Food and Drug Administration-approved drugs available. See 10 U.S.C. 

§ 1074g; 32 C.F.R. §§ 199.4(g), 199.21(h)(3)(iii).
 

Page 6 GAO-13-808 DOD Pharmacy Services Contract

Prior to 1997, both retail and mail-order pharmacy services for TRICARE 

beneficiaries were included as part of the regional TRICARE managed 

care support contracts. In subsequent years, DOD carved out mail-order 

pharmacy services, followed by retail pharmacy services, as separate 

national contracts. Later, mail-order and retail pharmacy services were 

combined in a single national contract. (See fig. 1.) According to DOD, 

pharmacy services were carved out for three primary reasons: (1) to 

ensure a more consistent and efficient provision of the pharmacy benefit, 

(2) to leverage cost savings from federal direct-purchasing pricing,13 and 

(3) to increase transparency in program utilization and cost data.14

 

13Under 38 U.S.C. § 8126(a)(2), DOD has access to federally negotiated prices from drug 

manufacturers that are 24 percent lower than nonfederal average manufacturer prices 

when DOD is the direct purchaser of the drugs, as it is for the mail-order pharmacy and 

military treatment facility pharmacies. These federal pricing arrangements are available for 

the “Big Four” federal agencies that procure pharmaceuticals: the Department of Veterans 

Affairs, DOD, the U.S. Public Health Service (part of the Department of Health and Human 

Services), and the Coast Guard (part of the Department of Homeland Security). The 

NDAA for fiscal year 2008 required that federal pricing arrangements be applied to drugs 

dispensed at retail pharmacies as of January 28, 2008. See Pub. L. No. 110-181, § 703, 

122 Stat. 3, 188 (codified at 10 U.S.C. § 1074g(f)). 

DOD 

continues to operate its military treatment facility pharmacies separately—

they are not covered under the pharmacy services contract. In fiscal year 

2012, military treatment facilities represented 40 percent of all TRICARE 

pharmacy utilization—measured as the number of days’ supply of drugs 

dispensed. Although TRICARE pharmacy services are contracted

separately from medical services, the pharmacy services contract 

requires the pharmacy services contractor and managed care support 

contractors to exchange information, such as data needed for care 

coordination.

14Department of Defense Military Health System Senior Oversight Committee, Response 

to the Recommendations of the Task Force on the Future of Military Health Care.

Management of TRICARE 

Pharmacy Services
 

Page 7 GAO-13-808 DOD Pharmacy Services Contract

Figure 1: Evolution of TRICARE Pharmacy Services Contract

As the current pharmacy services contractor, Express Scripts serves as 

the pharmacy benefit manager, providing TRICARE beneficiaries with 

access to a network of more than 57,000 retail pharmacies, operating the 

TRICARE mail-order pharmacy, conducting claims processing, and 

reimbursing beneficiaries for claims. Express Scripts is the nation’s 

largest pharmacy benefit manager, with $93.9 billion in revenue in 2012.15

In recent years, DOD has taken steps to curb rising pharmacy costs.16

 

15Express Scripts, 2012 Annual Report, (St. Louis, Mo.: 2013).

One step has been to encourage beneficiaries to use the TRICARE mailorder pharmacy, which provides cost savings to DOD compared to retail 

16We have previously reported on the need to reduce spending in DOD’s pharmacy 

program. See GAO, DOD Pharmacy Program: Continued Efforts Needed to Reduce 

Growth in Spending in Retail Pharmacies, GAO-08-327 (Washington, D.C.: April 2008).
 

Page 8 GAO-13-808 DOD Pharmacy Services Contract

pharmacies.17 In 2007, DOD established the Member Choice Center, 

operated by Express Scripts, to facilitate TRICARE beneficiaries’ use of 

the mail-order pharmacy by providing assistance with transferring retail 

prescriptions to mail-order. In fiscal year 2012, according to DOD, the 

mail-order pharmacy represented 42 percent of all TRICARE pharmacy 

utilization outside of military treatment facility pharmacies, up from 

32 percent in fiscal year 2011. In addition, in February 2013, in 

accordance with the NDAA for fiscal year 2013, DOD increased 

copayments for brand name and non-formulary drugs that are not filled at 

military treatment facility pharmacies by between 42 and 76 percent, 

depending on the pharmacy option used.18

DOD has also benefited from a legislative change and related court 

decision that resulted in reduced prescription drug costs for the 

department. The NDAA for fiscal year 2008 required that federal pricing 

arrangements that are available for drugs purchased by DOD, including 

those dispensed through military treatment facility pharmacies and the 

mail-order pharmacy, also be applied to drugs dispensed at TRICARE 

retail network pharmacies as of January 28, 2008.

For example, the copayment 

for a 30-day supply of a non-formulary drug filled at a network retail 

pharmacy increased from $25 to $44.

19 In March 2009, drug 

manufacturers began providing refunds to DOD for most brand-name 

drugs dispensed after DOD issued final regulations,20

 

17Specifically, DOD purchases drugs directly from manufacturers through an intermediary 

known as a prime vendor for drugs dispensed through the mail-order pharmacy (and at 

military treatment facility pharmacies). Under DOD’s contract with the prime vendor, the 

prime vendor provides drugs at a fixed percentage discount off of the lowest price 

otherwise available for each drug.

accounting for a 

decline in DOD’s retail pharmacy prescription drug costs in fiscal years 

2010 and 2011. In January 2013, a federal court ruled that drug

18See Pub. L. No. 112-239, § 712, 126 Stat. 1632, 1802 (2013) (codified at 10 U.S.C. 

§ 1074g(a)(6)).

19See Pub. L. No. 110-181, § 703, 122 Stat. 3, 188 (codified at 10 U.S.C. § 1074g(f)). This 

act provides that with respect to any prescriptions filled on or after January 28, 2008, the 

TRICARE retail pharmacy program is to be treated as an element of DOD for purposes of 

procurement of drugs by federal agencies under 38 U.S.C. § 8126 to ensure that drugs 

paid for by DOD that are dispensed to TRICARE beneficiaries at retail pharmacies are 

subject to federal pricing arrangements.

20See 32 C.F.R. § 199.21(q); 74 Fed. Reg. 11,279 (Mar. 17, 2009); 75 Fed. Reg. 63,383 

(Oct. 15, 2010).
 

Page 9 GAO-13-808 DOD Pharmacy Services Contract

manufacturers are required to refund to DOD the difference between the 

federal pricing arrangements and the retail price paid for prescriptions 

filled dating back to the NDAA’s enactment on January 28, 2008.21 As of 

July 31, 2013, according to DOD, its total estimated savings from fiscal 

year 2009 through fiscal year 2013 were about $6.53 billion as a result of 

these refunds.

DOD’s TRICARE Management Activity is responsible for overseeing the 

TRICARE program, including the pharmacy benefit. Within this office, the 

Pharmaceutical Operations Directorate (hereafter referred to as the 

program office) is responsible for managing the pharmacy benefit 

(including the contract to provide pharmacy services), and the Acquisition 

Management and Support Directorate (hereafter referred to as the 

contracting office) is responsible for managing all acquisitions for the 

TRICARE Management Activity. The two offices together manage the 

acquisition process for the pharmacy services contract. (See fig. 2.) The 

program office and the contracting office provide the clinical expertise and 

acquisition knowledge, respectively, for the acquisition planning, 

evaluation of proposals, and award of the pharmacy services contract.

 

21Coalition for Common Sense in Gov’t Procurement v. United States, 707 F.3d 311 (D.C. 

Cir. 2013). 

TRICARE’s Pharmacy 

Services Contracting 

Process and Roles
 

Page 10 GAO-13-808 DOD Pharmacy Services Contract

Figure 2: Selected Roles and Activities in the Acquisition Process for DOD’s Pharmacy Services Contract

a

The program office refers to the TRICARE Management Activity’s Pharmaceutical Operations 

Directorate.

b

The acquisition process for DOD’s pharmacy services contract includes 

three main phases: (1) acquisition planning, (2) RFP, and (3) award.

The contracting office refers to the TRICARE Management Activity’s Acquisition Management and 

Support Directorate.

22

Acquisition planning. In the acquisition planning phase, the 

program office, led by the program manager, is primarily 

responsible for defining TRICARE’s contract requirements—the 

work to be performed by the contractor—and developing a plan to 

meet those requirements. The program office also receives 

guidance and assistance from the contracting office in the 

development and preparation of key acquisition documents and in 

the market research process. The market research process can 

involve the development and use of several information-gathering 

tools, including requests for information (RFI), which are publicly 

released documents that allow the government to obtain feedback 

from industry on various acquisition elements such as the terms 

 

22There are federal- and department-level requirements that govern the process for each 

phase of the acquisition process. The regulatory policies for DOD acquisitions are outlined 

in the FAR and the DFARS. In addition, DOD and its TRICARE Management Activity 

issue other manuals, policies, and guidance documents to assist in the acquisition 

process.
 

Page 11 GAO-13-808 DOD Pharmacy Services Contract

and conditions of the contract. RFIs are also a means by which 

the government can identify potential offerors and determine 

whether the industry can meet its needs. In addition, we have 

previously reported that sound acquisition planning includes an 

assessment of lessons learned to identify improvements.23

RFP. In the RFP phase, the contracting officer—the official in the 

contracting office who has the authority to enter into, administer, 

modify, and terminate contracts—issues the RFP,

Towards the end of this phase, officials in the program and 

contracting offices work together to revise and refine key 

acquisition planning documents.

24

Award. In the award phase, the program and contracting offices 

are responsible for evaluating proposals and awarding a contract 

to the offeror representing the best value to the government based 

on a combination of technical and cost factors.

and receives 

the proposals.

To monitor the contractor’s performance under the contract after award, 

the contracting officer officially designates a program office official as the 

contracting officer’s representative (COR), who acts as the liaison 

between the contracting officer and the contractor and is responsible for 

the day-to-day monitoring of contractor activities to ensure that the 

services are delivered in accordance with the contract’s performance 

standards.25

 

23

The draft monitoring plan for the upcoming pharmacy 

services contract includes 30 standards—related to timeliness of claims 

processing, retail network access, and beneficiary satisfaction, among 

other things—against which the contractor’s performance will be 

measured.

GAO-11-672. 

24RFPs include a description of the contract requirements, the anticipated terms and 

conditions that will be contained in the contract, the required information that the 

prospective offerors must include in their proposal, and the factors that will be used to 

evaluate proposals. 

25As of July 2013, the pharmacy services contract had two CORs, one to monitor clinical 

issues and one to monitor operational and systems issues.
 

Page 12 GAO-13-808 DOD Pharmacy Services Contract

DOD has department-wide acquisition training and experience 

requirements for all officials who award and administer DOD contracts, 

including the pharmacy services contract, as required by law.26 Training is 

primarily provided through the Defense Acquisition University,27 and is 

designed to provide a foundation of acquisition knowledge, but is not 

targeted to specific contracts or contract types. In addition, all CORs must 

meet training and experience requirements specified in DOD’s Standard 

for Certification of Contracting Officer’s Representatives (COR) for 

Service Acquisitions issued in March 2010.28

In September 2010, DOD issued guidance to help improve defense 

acquisition through its Better Buying Power Initiative.

See appendix I for more 

information on the certification standards for and experience of officials 

who award and administer the pharmacy services contract.

29 DOD’s Better 

Buying Power Initiative encompasses a set of acquisition principles 

designed to achieve greater efficiencies through affordability, cost control, 

elimination of unproductive processes and bureaucracy, and promotion of 

competition; it provides guidance to acquisition officials on how to 

implement these principles. The principles are also designed to provide 

incentives to DOD contractors for productivity and innovation in industry 

and government.

 

26Defense Acquisition Workforce Improvement Act, Pub. L. No. 101-510, tit. XII, §§ 1201-

1211, 104 Stat. 1485, 1638 (1990) (codified at 10 U.S.C. ch. 87).

27The Defense Acquisition Workforce Improvement Act established the Defense 

Acquisition University as the primary provider of acquisition training for DOD and the 

military departments. See 10 U.S.C. § 1746.

28This standard defines DOD-wide minimum COR competencies, experience, and training 

according to the complexity of requirements and contract performance risk.

29DOD updated its Better Buying Power Initiative guidance in April 2013.
 

Page 13 GAO-13-808 DOD Pharmacy Services Contract

DOD used market research to align the requirements for the upcoming 

pharmacy services contract with industry best practices and promote 

competition. DOD also identified changes to the requirements for the 

upcoming and current contracts in response to changes in legislation, 

efforts to improve service delivery, and contractor performance.

DOD solicited information from industry during its acquisition planning for 

the upcoming pharmacy services contract through the required market 

research process,30

Align contract requirements with industry best practices. 

DOD issued five RFIs from 2010 through 2012 related to the 

upcoming contract. RFIs are one of several market research 

methods available to federal agencies.

including issuing RFIs and a draft RFP for industry 

comment, to identify changes to requirements for its pharmacy services 

contract. Specifically, DOD used market research to align the 

requirements for the upcoming contract with industry best practices and 

promote competition.

31 Although DOD is not 

required to use them, RFIs are considered a best practice for 

service acquisitions in the federal government.32

 

30See FAR § 10.001(a)(2) and DFARS § 210.001(a).

The RFIs 

provided DOD with the opportunity to assess the capability of 

potential offerors to provide services that DOD may incorporate in 

the upcoming pharmacy services contract. In many of the RFIs, 

31See FAR § 10.002(b)(2).

32See, for example, Office of Management and Budget, Office of Federal Procurement 

Policy, “Myth-Busting”: Addressing Misconceptions to Improve Communication with 

Industry During the Acquisition Process, Memorandum for Chief Acquisition Officers, 

Senior Procurement Representatives, Chief Information Officers (Washington, D.C.: 

Feb. 2, 2011) and Office of Management and Budget, Office of Federal Procurement

Policy, “Myth-Busting 2”: Addressing Misconceptions and Further Improving 

Communication During the Acquisition Process, Memorandum for Chief Acquisition 

Officers, Senior Procurement Representatives, Chief Information Officers (Washington, 

D.C.: May 7, 2012). 

DOD Used Various 

Methods to Identify 

Changes to Contract 

Requirements for the 

Upcoming and 

Current Pharmacy 

Services Contracts

DOD Used Market 

Research to Align the 

Requirements for Its 

Upcoming Pharmacy 

Services Contract with 

Industry Best Practices 

and Promote Competition
 

Page 14 GAO-13-808 DOD Pharmacy Services Contract

DOD asked questions about specific market trends so that it could 

determine if changes were needed to the upcoming contract 

requirements to help align them with industry best practices. For 

example, DOD issued one RFI in November 2010 that asked 

about establishing a mechanism that would allow for centralized 

distribution of specialty pharmaceuticals and preserve DOD’s 

federal pricing arrangements. Specialty pharmaceuticals—highcost injectable, infused, oral, or inhaled drugs that are generally 

more complex to distribute, administer, and monitor than 

traditional drugs—are becoming a growing cost driver for 

pharmacy services. According to DOD officials, the RFI responses 

received from industry generally reinforced their view that the RFP 

should define any specialty pharmacy owned or sub-contracted by 

the contractor as a DOD specialty mail-order outlet, which would 

subject it to the same federal pricing arrangements as the mailorder pharmacy.

Promote competition. DOD has also used the RFI process to 

obtain information on promoting competition. DOD recognized that 

a limited number of potential offerors may have the capability to 

handle the pharmacy services contract given the recent 

consolidation in the pharmacy benefit management market33

 

33One of the largest recent mergers was Express Scripts’ acquisition of Medco Healthcare 

Solutions in 2012. As a result, the nation’s four largest pharmacy benefit managers 

(Express Scripts, CVS Caremark, OptumRx, and Catamaran) are projected to represent 

over 70 percent of the market in 2013.

and 

the large size of the TRICARE beneficiary population. DOD 

contracting officials told us that, in part because of the 

department’s Better Buying Power Initiative to improve acquisition 

practices, they have a strong focus on maintaining a competitive 

contracting environment for the pharmacy services contract, 

thereby increasing the use of market research early in the 

acquisition planning process. For example, DOD’s December 

2011 RFI asked for industry perspectives on the length of the 

contract period. DOD was interested in learning whether a longer 

contract period would promote competition. DOD officials told us 

that the responses they received confirmed that potential offerors 

would prefer a longer contract period because it would allow a 

non-incumbent more time to recover any capital investment made 

as part of implementing the contract. The RFP for the upcoming 
 

Page 15 GAO-13-808 DOD Pharmacy Services Contract

contract includes a contract period of 1 base year and 7 option 

years.34 DOD also used the RFI process to confirm that there 

were a sufficient number of potential offerors to ensure full and 

open competition for the pharmacy services contract. DOD 

officials told us that they found there were at least six potential 

offerors, which gave them confidence that there would be 

adequate competition.35

Since the start of the current pharmacy services contract in 2009, DOD 

has identified changes to the contract requirements in response to 

legislative changes to the pharmacy benefit, efforts to improve service 

delivery to beneficiaries, and improvements identified through monitoring 

of the current contractor’s performance. In each instance, DOD officials 

needed to determine whether to make the change for the upcoming 

contract, or whether to make the change via a modification to the current 

contract.36 According to DOD officials, there were over 300 modifications 

to the current pharmacy services contract; 23 of these were changes to 

the work to be done by the contractor.37

Legislative changes to the pharmacy benefit. Legislative 

changes have been one key driver of DOD’s revisions to its 

pharmacy services contract requirements. For example, one 

legislative change required DOD to implement the TRICARE 

DOD officials told us that it is not 

possible to build a level of flexibility into the contract to accommodate or 

anticipate all potential changes (and thus avoid modifications to the 

contract), because doing so would make it difficult for offerors to 

determine pricing in their proposals.

 

3410 U.S.C. § 2304a(f) and FAR § 217.204(e) establish a 5-year limit on the contract 

period of service contracts. The contract period may be subsequently extended for one or 

more option periods but may not exceed 10 years unless the head of the agency 

determines in writing that exceptional circumstances require a longer contract period.

35See FAR § 15.403-1(c)(1). 

36In making this determination, DOD officials consider several issues, including the time 

frame for implementing the change and the associated costs.

37According to DOD officials, other reasons for modifications to the contract included 

updates to the TRICARE manuals and administrative changes to contract wording.

DOD Identified Changes to 

Requirements for its 

Upcoming and Current 

Pharmacy Services 

Contracts in Response to 

Legislation, Efforts to 

Improve Service Delivery, 

and Contractor 

Performance
 

Page 16 GAO-13-808 DOD Pharmacy Services Contract

Young Adult program,38 which resulted in DOD adding a 

requirement for the contractor to extend pharmacy services to 

eligible military dependents through the age of 26. This change 

was made as a modification under the current contract. Another 

legislative change that necessitated changes to the contract 

requirements was the increase in beneficiary copayments for 

drugs obtained through mail-order or retail pharmacies, enacted 

as part of the NDAA for fiscal year 2013, which DOD changed 

through a modification to the current contract.39 A third legislative 

change to the pharmacy benefit was the mail-order pilot for 

maintenance drugs for TRICARE for Life beneficiaries.40

Efforts to improve service delivery. DOD has also updated 

contract requirements to improve service delivery to beneficiaries 

under the pharmacy services contract. DOD initiated a 

modification to the current contract to require the contractor to 

provide online coordination of benefits for beneficiaries with health 

care coverage from multiple insurers. Specifically, the contractor is 

required to ensure that pharmacy data systems include 

information on government and other health insurance coverage 

to facilitate coverage and payment determinations. According to 

DOD officials, this change is consistent with the updated national 

DOD 

officials incorporated this change in the requirements for the

upcoming pharmacy services contract, as outlined in the RFP.

 

38The TRICARE Young Adult program was implemented in 2011. The NDAA for fiscal 

year 2011 required that TRICARE coverage be extended to unmarried dependents of 

TRICARE beneficiaries up to age 26 who are not eligible for employer-sponsored health 

insurance, which is similar to a provision in the Patient Protection and Affordable Care Act 

that directed certain private health insurance plans to extend coverage to dependent 

children up to age 26. See Pub. L. No. 111-383, § 702, 124 Stat. 4137, 4244-45 (2011) 

(codified at 10 U.S.C. § 1110b).

39In accordance with the NDAA for fiscal year 2013, copayment amounts were increased 

for prescriptions for brand-name and non-formulary drugs filled through the mail-order 

pharmacy or through retail pharmacies beginning in February 2013. See Pub. L. No. 112-

239, § 712, 126 Stat. 1632, 1802 (2013) (codified at 10 U.S.C. § 1074g(a)(6)).

40The NDAA for fiscal year 2013 generally requires that, under the pilot, TRICARE for Life 

beneficiaries receive refills of all maintenance drugs through the mail-order pharmacy or 

military treatment facility pharmacies for at least 1 year, after which time they may opt out 

of the pilot. See Pub. L. No. 112-239, § 716, 126 Stat. 1632, 1804 (2013). Maintenance 

drugs are prescribed for chronic, long-term conditions and are taken on a regular, 

recurring basis. Examples of chronic conditions that may require maintenance drugs are 

high blood pressure, high cholesterol, and diabetes.
 

Page 17 GAO-13-808 DOD Pharmacy Services Contract

telecommunication standard from the National Council for 

Prescription Drug Programs, which provides a uniform format for 

electronic claims processing.41

Contractor performance. DOD officials told us that 

improvements identified through the monitoring of contractor 

performance have also led to changes in contract requirements. 

Through the CORs’ monitoring of the contractor’s performance 

against the standards specified in the contract, the CORs may 

determine that a particular standard is not helping to achieve the 

performance desired or is unnecessarily restrictive. For example, 

DOD officials told us that in the current contract, they had a threetiered standard for paper claims processing (e.g., 95 percent of 

paper claims processed within 10 days, 99 percent within 20 days, 

and 100 percent within 30 days). Through monitoring the 

contractor’s performance, the CORs determined that there was a 

negligible difference between the middle and high tiers, and 

holding the contractor to this performance standard was not 

beneficial. The requirements for the upcoming contract as 

described in the RFP only include two tiers—95 percent of claims 

processed within 14 calendar days, and 100 percent within 

28 calendar days.

According to DOD officials, this 

change to the contract requirements eliminates the need for 

beneficiaries to file paper claims when TRICARE is the secondary 

payer, simplifying the process for beneficiaries and reducing costs 

for DOD. Another modification to the current contract to improve 

service delivery was to require the contractor to provide vaccines 

through its network of retail pharmacies. According to DOD 

officials, this modification was made to allow beneficiaries to 

access vaccines through every possible venue, driven by the 2010 

H1N1 influenza pandemic.

When making changes to contract requirements, DOD officials told us 

they try to ensure that the requirements are not overly prescriptive, but 

rather outcome-oriented and performance-based. For example, DOD 

officials told us that they allowed the pharmacy and managed care 

support contractors to innovate and apply industry best practices 

 

41The National Council for Prescription Drug Programs is a nonprofit standards 

development organization representing various sectors of the pharmacy services industry.
 

Page 18 GAO-13-808 DOD Pharmacy Services Contract

regarding coverage and coordination of home infusion services.42

According to DOD officials, the contract requirements regarding home 

infusion are focused on the desired outcome—providing coordination of 

care for beneficiaries needing these services with the physician as the 

key decision maker—and DOD officials facilitated meetings between the

pharmacy contractor and managed care support contractors to determine 

the details of how to provide the services.43 This approach is consistent 

with DOD’s Better Buying Power principles that emphasize the 

importance of well-defined contract requirements and acquisition officials’ 

understanding of cost-performance trade-offs. This approach also 

addresses a concern we have previously identified regarding overly 

prescriptive contract requirements in TRICARE contracts; specifically, in 

our previous work on the managed care support contracts, we reported 

that DOD’s prescriptive requirements limited innovation and competition 

among contractors.44

 

42When home infusion was added as a new covered service under TRICARE, DOD 

officials modified the pharmacy services contract to include it, effective January 2012. 

Home infusion requires coordination among providers of drugs, equipment, and skilled 

nursing care, as needed. See GAO, Home Infusion Therapy: Differences between 

Medicare and Private Insurers’ Coverage, GAO-10-426 (Washington D.C.: June 7, 2010), 

for information about Medicare’s and private insurers’ coverage of home infusion services.

43Additionally, according to DOD, coordination between the managed care support 

contractors and the pharmacy contractor regarding home infusion is needed because the 

costs for drugs are far greater when obtained under the medical benefit, allowing for 

significant cost savings to be realized when drugs are obtained under the pharmacy 

benefit.

44See GAO, Defense Health Care: Lessons Learned from TRICARE Contracts and 

Implications for the Future, GAO-01-742T (Washington, D.C.: May 17, 2001).
 

Page 19 GAO-13-808 DOD Pharmacy Services Contract

Since retail pharmacy services were carved out about 10 years ago, DOD 

has not conducted an assessment of the appropriateness of its current 

pharmacy services contract structure that includes an evaluation of the 

costs and benefits of alternative structures. Alternative structures can 

include a carve-in of all pharmacy services into the managed care support 

contracts, or a structure that carves in a component of pharmacy 

services, such as the mail-order pharmacy, while maintaining a carve-out 

structure for other components. DOD officials told us they believe that 

DOD’s current pharmacy services contract structure continues to be 

appropriate, as it affords more control over pharmacy data and allows for 

more detailed data analyses and increased transparency about costs. 

DOD’s continued use of a carve-out contract structure for pharmacy 

services is consistent with findings from research and perspectives we 

heard from industry group officials—that larger employers are more likely 

to carve out pharmacy services to better leverage the economies of scale 

and cost savings a stand-alone pharmacy benefit manager can achieve.45

In its December 2007 report, the Task Force on the Future of Military 

Health Care recommended examining an alternative structure for the 

pharmacy services contract.

These arrangements may also provide more detailed information on drug 

utilization that can be helpful in managing drug formularies and their 

associated costs.

46

 

45See Mercer Human Resource Consulting, Prescription Drug Benefit Plans: A Buyer’s 

Guide (Oakland, CA: California HealthCare Foundation, Jan. 2003); and Mercer, National 

Survey of Employer Sponsored Health Plans 2011, (New York, N.Y.: Marsh and 

McLennan Companies, 2011).

In addition to other aspects of DOD’s 

health care system, the task force reviewed DOD’s pharmacy benefit 

program, recommending that DOD pilot a carve-in pharmacy contract 

structure within one of the TRICARE regions with a goal of achieving 

better financial and health outcomes as a result of having more integrated 

pharmacy and medical services. The managed care support contractors 

we spoke with expressed similar concerns. However, DOD did not agree 

with the task force’s recommendation. In its response, DOD assessed the 

46See Department of Defense, Final Report of the Task Force on the Future of Military 

Health Care. The NDAA for Fiscal Year 2007 directed DOD to establish a task force to 

assess health care services provided to members of the military, retirees, and their 

families, and to make recommendations for sustaining those services. See Pub. L. 

No. 109-364, § 711, 120 Stat. 2083, 2284-87 (2006).

DOD Has Not 

Conducted an 

Assessment of Its 

Pharmacy Services 

Contract that Includes 

an Evaluation of the 

Costs and Benefits of 

Alternative Structures
 

Page 20 GAO-13-808 DOD Pharmacy Services Contract

benefits of the current structure and affirmed the department’s 

commitment to this structure.47

Potential cost savings. In its response to the task force report, 

DOD did not concur with the recommendation to pilot a carve-in 

pharmacy contract structure, in part because of the cost savings 

achieved through the carve-out. Specifically, DOD stated that the 

carve-out arrangement is compatible with accessing federal 

pricing arrangements and other discounts available for direct 

purchases. DOD stated in its response that, under a carve-in 

arrangement, even on a pilot basis, it would lose access to 

discounts available for direct purchases, including some portion of 

the $400 million in annual discounts available for drugs dispensed 

at retail pharmacies under the NDAA for fiscal year 2008. DOD 

officials told us that this loss would result from the managed care 

support contractor being the purchaser of the drugs, rather than 

DOD. DOD also stated that it would possibly lose access to the 

volume discounts obtained for drugs purchased for the mail-order

pharmacy and military treatment facility pharmacies under a 

carve-in structure. DOD officials told us that these disadvantages 

of a carve-in structure remain the same today. Additionally, during 

this review, DOD noted that dividing the TRICARE beneficiary

population among contractors under a carve-in would dilute the 

leverage a single pharmacy benefit manager would have in the 

market. For example, DOD would lose economies of scale for 

claims processing services provided by the pharmacy contractor, 

resulting in increased costs.

However, research studies have found, and officials from 

TRICARE’s managed care support contractors told us, that a 

contract structure with integrated medical and pharmacy services 

could result in cost savings for DOD. For example, one recent 

study found that employers with carve-in health plans had 

3.8 percent lower total medical care costs compared to employers 

 

47Department of Defense Military Health System Senior Oversight Committee, Response 

to the Recommendations of the Task Force on the Future of Military Health Care. 
 

Page 21 GAO-13-808 DOD Pharmacy Services Contract

with pharmacy services carved out.48 The researchers attributed 

the cost difference, in part, to increased coordination of care for 

the carve-in plans, leading to fewer adverse events for patients, 

resulting in fewer inpatient admissions; they reported that plans 

with a carve-out arrangement had 7 percent higher inpatient 

admissions. Similarly, representatives from one managed care 

support contractor we spoke with stated they thought they could 

achieve similar cost savings to what DOD currently has through its 

federal pricing arrangements by using integrated medical and 

pharmacy services as a means of reducing costs in a carve-in 

arrangement. Being able to analyze integrated, in-house medical 

and pharmacy data may help health plans to lower costs by 

identifying high-cost beneficiaries, including those with chronic 

conditions such as asthma and diabetes, and targeting timely and 

cost-effective interventions for this population.49

Potential health benefits from data integration. In 

recommending that DOD pilot a carve-in pharmacy contract 

structure, one of the task force’s goals was to improve health 

outcomes as a result of integrated medical and pharmacy 

services. DOD noted in its task force response that it could 

achieve this goal under the current carve-out contract structure by 

including requirements in the pharmacy services contract and 

managed care support contracts requiring data sharing between 

the contractors.

While the current contract requires the pharmacy and managed 

care support contractors to exchange data for care coordination, 

current TRICARE managed care support contractors told us there 

continue to be challenges with data sharing to facilitate disease 

 

48See HealthPartners, HealthPartners Pharmacy Integration Study: Demonstrating the 

value of medical and pharmacy benefit integration, (Bloomington, Minn.: HealthPartners, 

Inc., October 2010); and E.J. Culley, L.C. Williams, and L. Thomas, “Pharmacy Benefit 

Carve-In: The Right Prescription for Cost Savings,” Benefits & Compensation Digest, vol. 

47, no. 2 (2010). 

49See Culley, Williams, and Thomas, “Pharmacy Benefit Carve-In,” 24; and T. Dickman, 

“Carve-in Strategy Adds Context to Integrated Pharmacy Investment,” Managed 

Healthcare Executive, vol. 13, no. 7 (2003).
 

Page 22 GAO-13-808 DOD Pharmacy Services Contract

management.50 Contractors expressed similar concerns about 

sharing medical and pharmacy data as part of our previous work 

related to DOD’s managed care support contracts.51 Additionally, 

during this review, officials from one of the managed care support 

contractors told us that they continue to find it challenging to 

generate data that provide a holistic view of beneficiaries when 

medical and pharmacy data remain separate. Representatives 

from another managed care support contractor told us that their 

disease management staff faced challenges in analyzing 

pharmacy data for groups of patients they were managing. They 

also told us that if these staff had more complete and real-time 

access to pharmacy data, as they would under a carve-in 

structure, they could be more proactive in assisting DOD’s efforts 

to identify patients who should participate in disease management 

programs. Additionally, researchers have found that disease 

management interventions may be challenging to conduct in a 

carve-out arrangement due to the lack of fully integrated medical 

and pharmacy data.52

According to DOD officials, any changes to the current contract structure 

would result in less efficient and inconsistent pharmacy service delivery 

across the three TRICARE regions, as officials observed when the retail 

pharmacy benefit was part of the managed care support contracts. One of 

DOD’s reasons for the initial carve-out was a concern that pharmacy 

services were not being consistently implemented across the TRICARE 

regions. For example, DOD officials told us that two health plans in 

different TRICARE regions were able to have different preferred drugs 

within the same therapeutic class, and while both drugs may be included 

on DOD’s formulary, beneficiaries in different parts of the country were 

not being consistently provided with the same drug. In addition, according 

to DOD, beneficiaries were dissatisfied with a benefit that was not 

portable across TRICARE regions—specifically, retail pharmacy networks 

 

50Disease management involves providing coordinated health care interventions and 

communications to patients who have chronic conditions, such as diabetes or asthma, 

where patients’ self-care efforts can affect their health outcomes.

51GAO, Defense Health Care: Implementation Issues for New TRICARE Contracts and 

Regional Structure, GAO-05-773 (Washington, D.C.: July 2005).

52See Culley, Williams, and Thomas, “Pharmacy Benefit Carve-In,” 24; and Dickman, 

“Carve-in Strategy,” 31.
 

Page 23 GAO-13-808 DOD Pharmacy Services Contract

differed by region, so beneficiaries who moved from one TRICARE region 

to another would have to change retail pharmacy networks. With one 

national pharmacy services contract, DOD officials said they can ensure 

that the formulary is implemented consistently and that beneficiaries have 

access to the same retail pharmacy network across the TRICARE 

regions.

Since the current pharmacy services contract structure was implemented 

almost 10 years ago, DOD has not incorporated an assessment of the 

contract structure that includes an evaluation of alternative structures into 

its acquisition planning activities. DOD officials told us that they consider 

their task force response to be an assessment of the current contract 

structure. While the response included a justification for the current 

structure, it did not include an evaluation of the potential costs and 

benefits of alternative structures, such as carving in all or part of the 

pharmacy benefit. In addition, the acquisition plan for the upcoming 

contract described two alternative carve-out configurations (separate 

contracts for the mail-order and retail pharmacies and a governmentowned facility to house drugs for the mail-order pharmacy contract). 

However, the plan similarly did not include an evaluation of the potential

costs and benefits of these options, nor did the plan include an evaluation 

of any carve-in alternatives. DOD officials told us there are no current 

plans to conduct such an evaluation as part of the department’s 

acquisition planning efforts.

DOD officials also told us that they continue to believe the current 

structure is appropriate because the current carve-out structure provides 

high beneficiary satisfaction and is achieving DOD’s original objectives, 

namely consistent provision of benefits, access to federal pricing 

arrangements, and transparency of pharmacy utilization and cost data. 

Further, officials told us that the current carve-out structure is more 

efficient to administer with one pharmacy services contractor than the 

previous carve-in structure that involved multiple managed care support 

contractors.

While DOD officials believe the current structure is appropriate, there 

have been significant changes in the pharmacy benefit management 

market in the past decade. These changes include mergers, as well as 

companies offering new services that may change the services and 

options available to DOD. For example, representatives from one 

managed care support contractor we spoke with told us that they can 

offer different services to DOD today than they were able to offer when 

pharmacy services were part of the managed care support contracts. 
 

Page 24 GAO-13-808 DOD Pharmacy Services Contract

While the contractor had previously sub-contracted with a separate 

pharmacy benefit manager to provide pharmacy services under its 

managed care support contract, this contractor’s parent company now 

provides in-house pharmacy benefit management services for its 

commercial clients. Additionally, according to the parent company of 

another managed care support contractor, its recent decision to bring 

pharmacy benefit management services in-house will enhance its ability 

to manage total health care costs and improve health outcomes for clients 

who carve in pharmacy services.

As we have previously reported, sound acquisition planning includes an 

assessment of lessons learned to identify improvements.53 The time 

necessary for such activities can vary greatly, depending on the 

complexity of the contract. We have also reported that a comparative 

evaluation of the costs and benefits of alternatives can provide an 

evidence-based rationale for why an agency has chosen a particular 

alternative (such as a decision to maintain or alter the current pharmacy 

services contract structure).54 We have reported that such an evaluation 

would consider possible alternatives and should not be developed solely 

to support a predetermined solution.

With each new pharmacy services contract, DOD officials have the 

opportunity to conduct acquisition planning activities that help determine 

whether the contract—and its current structure—continues to meet the 

department’s needs, including providing the best value and services to 

the government and beneficiaries. These activities can include changing 

requirements as necessary, learning about current market trends, and 

incorporating new information and lessons learned. Acquisition planning 

can also incorporate an assessment of the pharmacy services contract 

structure that includes an evaluation of the potential costs and benefits of 

alternative contract structures. Incorporating such an evaluation into the 

acquisition planning for each new pharmacy services contract can provide 

DOD with an evidence-based rationale for why maintaining or changing 

the current structure is warranted. Without such an evaluation, DOD 

cannot effectively demonstrate to Congress and stakeholders that it has 

 

53GAO-11-672. 

54GAO-09-3SP. 

Conclusions 
 

Page 25 GAO-13-808 DOD Pharmacy Services Contract

chosen the most appropriate contract structure, in terms of costs to the 

government and services for beneficiaries.

To provide decision makers with more complete information on the 

continued appropriateness of the current pharmacy services contract 

structure, and to ensure the best value and services to the government 

and beneficiaries, we recommend that the Secretary of Defense direct the 

Assistant Secretary of Defense (Health Affairs) to take the following two 

actions:

conduct an evaluation of the potential costs and benefits of alternative 

contract structures for the TRICARE pharmacy services contract; and

incorporate such an evaluation into acquisition planning.

We provided a draft of this report to DOD for comment. DOD generally 

concurred with our findings and conclusions and concurred with our 

recommendations. DOD also commented that based on past experience 

with alternative contract structures, it is confident that the current contract 

structure is the most cost efficient and beneficial.

In response to our recommendation that DOD conduct an evaluation of 

the potential costs and benefits of alternative contract structures for the 

TRICARE pharmacy services contract, DOD commented that there is a 

lack of data to support inferences that a carve-in arrangement would 

result in cost savings to the government, and noted that the full 

development of two separate RFPs would be necessary to provide a valid 

cost comparison. While detailed cost estimates can be a useful tool for 

DOD, they are not the only means of evaluating alternative structures for 

the pharmacy services contract. For example, as we noted in our report, 

DOD has previously used RFIs to obtain information from industry to 

inform its decisions about the pharmacy services contract, and this 

process also may be helpful in identifying costs and benefits of alternative 

contract structures.

In response to our recommendation that DOD incorporate such an 

evaluation into acquisition planning, DOD commented that it included an 

evaluation of its past contract experience into acquisition planning for the 

upcoming pharmacy services contract. However, as noted in our report, 

the acquisition plan for the upcoming contract did not include an 

evaluation of the potential costs and benefits of alternative contract 

Recommendations for 

Executive Action

Agency Comments

and Our Evaluation
 

Page 26 GAO-13-808 DOD Pharmacy Services Contract

structures, and DOD did not directly address how it would include such an 

evaluation in its acquisition planning activities. We continue to emphasize 

the importance of having an evidence-based rationale for why maintaining 

or changing the current structure is warranted. With each new pharmacy 

services contract, DOD officials have the opportunity to determine 

whether the contract continues to meet the department’s needs, including 

providing the best value to the government and services to beneficiaries. 

In addition, DOD stated in its comments that our report did not address its 

direct-care system and noted that carving pharmacy services back into 

the managed care support contracts would fragment the pharmacy 

benefit and undermine its goal of integrating all pharmacy points of 

service. Our review was focused on DOD’s purchased-care system for 

providing pharmacy services, although we did provide context about the 

direct-care system as appropriate. Furthermore, we did not recommend 

any specific structure for DOD’s pharmacy services contract, but rather 

that DOD evaluate the costs and benefits of alternative structures such 

that it can have an evidence-based rationale for its decisions.

DOD’s comments are reprinted in appendix II. DOD also provided 

technical comments, which we incorporated as appropriate.

We are sending copies of this report to appropriate congressional 

committees; the Secretary of Defense; the Assistant Secretary of Defense 

(Health Affairs); and other interested parties. In addition, the report will 

be available at no charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-7114 or at draperd@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix III.

Debra A. Draper

Director, Health Care
Appendix I: Certification Standards for and 

Experience of TRICARE Pharmacy Services 

Contract Officials

Page 27 GAO-13-808 DOD Pharmacy Services Contract

Department of Defense (DOD) officials who award and administer the 

TRICARE pharmacy services contract are required to meet relevant 

certification standards applicable to all DOD acquisition officials and, 

according to DOD officials, some of these officials also have pharmacyspecific experience.1 The training and related education and experience 

requirements are tailored to different levels of authority and, due to the 

size and complexity of the pharmacy services contract, the contracting 

officer and program manager for the pharmacy services contract are 

required to be certified at the highest levels, which require the most 

training and experience.2 In addition, all contracting officer’s 

representatives (COR) must meet specific training and experience 

requirements based on the complexity and risk of the contracts they will 

be working with,3 and the two CORs for the pharmacy services contract 

are also required to meet the highest COR certification level. For 

example, the CORs for the pharmacy services contract must complete at 

least 16 hours of COR-specific continuing education every 3 years, which 

is twice the amount required for low-risk, fixed-price contracts. DOD’s 

department-wide acquisition training is primarily provided through the 

Defense Acquisition University.4

 

1

In our work, we did not determine whether DOD officials who award and administer the 

TRICARE pharmacy services contract complied with certification standards, nor did we 

verify information provided regarding these officials’ pharmacy-specific experience. In May 

2013, the DOD Inspector General reported that selected acquisition staff within the 

TRICARE Management Activity did not have required certifications, accurate position 

descriptions, or proper training, and recommended that the TRICARE Management 

Activity improve oversight of these issues. TRICARE officials agreed with the 

recommendations and stated that corrective actions would be implemented within a year. 

See Department of Defense, Inspector General, TRICARE Management Activity Needs to 

Improve Oversight of Acquisition Workforce, DODIG-2013-078 (Alexandria, Va.: May 1, 

2013). Although, according to a DOD Inspector General official, pharmacy services 

contract staff were not included in the scope of the audit, the recommendations apply to all 

TRICARE Management Activity acquisition staff, which would include officials who award 

and administer the pharmacy services contract.

Training is designed to provide a 

foundation of acquisition knowledge but is not targeted to specific 

contracts or contract types. Beyond DOD’s required training, the 

2

See Defense Acquisition Workforce Improvement Act, Pub. L. No. 101-510, tit. XII, 

§§ 1201-1211. 104 Stat. 1485, 1638 (1990) (codified at 10 U.S.C. ch. 87).

3

Department of Defense, DOD Standard for Certification of Contracting Officer’s 

Representatives (COR) for Service Acquisitions, (Washington, D.C.: 2010).

4

The Defense Acquisition Workforce Improvement Act established the Defense 

Acquisition University as the primary provider of acquisition training for DOD and the 

military departments. See 10 U.S.C. § 1746.

Appendix I: Certification Standards for and 

Experience of TRICARE Pharmacy Services

Contract Officials
Appendix I: Certification Standards for and 

Experience of TRICARE Pharmacy Services 

Contract Officials

Page 28 GAO-13-808 DOD Pharmacy Services Contract

contracting officer, program manager, and CORs also have specialized 

experience in pharmacy and related issues. See table 2 for the specific 

certification standards for and pharmacy-specific experience of the 

officials responsible for awarding or administering the pharmacy services 

contract.

Table 2: Acquisition Training, Education, and Experience Certification Standards and Pharmacy-Specific Experience of 

Officials Who Award or Administer the TRICARE Pharmacy Services Contract

Certification standards

Official 

Acquisition training 

and education Acquisition experience a Pharmacy-specific experience 

held by officials as of May 2013

Contracting officer Minimum four core courses; 

Bachelor’s degree and 

24 semester hours of 

relevant coursework

Four additional courses preferred 

for officials holding this position; 

Master’s degree preferred

80 hours of continuing education 

required every 2 years

4 years acquisition experience

Additional 4 years acquisition 

experience preferred

The contracting officer also has 

on-the-job experience with 

TRICARE’s pharmacy and 

managed care support contracts.

Program manager Minimum six core courses; no 

education standard

Eight additional courses preferred 

for officials holding this position; 

Master’s degree in relevant field 

preferred 

2 years acquisition experience, 

including 1 year in program 

management

Additional 2 years acquisition 

experience preferred

The program manager is a 

registered pharmacist.

Contracting officer’s 

representative (COR)

8 hours of coursework required

At least 16 hours of COR-specific 

continuing education required 

every 3 years

12 months of DOD experience The two CORs for the pharmacy 

contract together have experience 

with clinical and 

operations/systems aspects of the 

pharmacy program. The current 

clinical COR holds a doctoral 

degree in pharmacy. The current 

operations COR holds a bachelors 

degree in Information Technology 

and has pharmacy experience 

from prior military service.

Source: GAO analysis of DOD information.

Note: In our work, we did not determine whether DOD officials complied with certification standards, 

nor did we verify information provided regarding pharmacy-specific experience.

a

Training is primarily provided through the Defense Acquisition University.
Appendix II: Comments from the Department 

of Defense

Page 29 GAO-13-808 DOD Pharmacy Services Contract

Appendix II: Comments from the Department 

of Defense
Appendix II: Comments from the Department 

of Defense

Page 30 GAO-13-808 DOD Pharmacy Services Contract
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 31 GAO-13-808 DOD Pharmacy Services Contract

Debra A. Draper, (202) 512-7114 or draperd@gao.gov

In addition to the contact named above, Janina Austin, Assistant Director; 

Lisa Motley; Laurie Pachter; Julie T. Stewart; Malissa G. Winograd; and 

William T. Woods made key contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(291104)
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